Euro: Political risks cap recovery against US Dollar – Rabobank

Rabobank's Senior FX StrategistJane Foley discusses EUR/USD, noting that the European Central Bank (ECB) is expected to keep rates unchanged, with another hike likely in December. Foley highlights widening French OAT–Bund spreads, easing ECB hike expectations, and rising far-right political risks in France and Germany as key factors keeping the Euro and EUR/USD under pressure, with a lower 3‑month forecast.

Euro pressured by politics and rates

"Economists appear to be mostly agreed that the ECB will leave rates unchanged at today’s policy meeting. Inflation risks remain in evidence but have not increased meaningfully. In any case, the recent rise in long term interest rates suggests that monetary conditions have tightened while higher energy prices are likely to be a drag on growth potential, despite the surprising resilience of the Eurozone economy this year."

"It is RaboResearch’s view, and that of many others, that the ECB will hike rates again in December. The Fed is also widely expected to raise rates again in December, having opted for steady policy yesterday, in line with market expectations.

"The tightening in monetary conditions implied by the rise in long-term interest rates in the Eurozone can be linked with an easing in market expectations for ECB rate hikes. At the start of this month, many market economists were of the view that another rate hike would be forthcoming this month. A drop in October rate hike expectation has weighed on the EUR, which is the worst performing G10 currency in the month to date."

"Political uncertainties for Europe, fears over the impact of high energy prices and elevated concerns about Russian hybrid warfare all suggest a difficult outlook for the EUR. While the single currency is likely to see some short-term relief if a French budget is passed this year, we see limited scope for a sustained recovery. We have revised down our 3-month EUR/USD forecast to 1.10 from 1.13."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)